Capital gains vs a parent to kid loan Tax advise

[Deckin Around]

Scenario:
Parents want to help their 2 adult daughters "kids" with let's say $100k each for home upgrades & repairs.
They have plenty of assets but no liquid cash and hate the idea of paying capital gains on stocks or other assets that are making money.
The assets are in a trust for the kids which will have to be taxed eventually but the parents won't be around to see the Uncle Sam money grab.

Some advise that was given was to have the parents borrow money against their assets and the kids pay the Interest payment as long as the parents are alive or the loan is paid off.
The difference is obviously the interest paid on the parent's loan ($30k-ish on a 10year $100k loan) but the parents would not see any capital gains hit and they are still making money on the assets they didn't have to liquidate. If the retained assets make as much as the interest on the new loan, it's a wash and the kids got the money earlier than when the trust distribution is done years later.

Is there a better way?

Thanks

 

[beerrun]

Scenario:
Parents want to help their 2 adult kids with let's say $100k each for home upgrades & repairs.
They have plenty of assets but no liquid cash and hate the idea of paying capital gains on stocks or other assets that are making money.
The assets are in a trust for the kids which will have to be taxed eventually but the parents won't be around to see the Uncle Sam money grab.

Some advise that was given was to have the parents borrow money against their assets and the kids pay the P&I payment as long as the parents are alive or the loan is paid off.
The difference is obviously the interest paid on the parent's loan ($30k-ish on a 10year $100k loan) but the parents would not see a any capital gains hit and they are still making money on the assets they didn't have to liquidate.

Is there a better way?

Thanks

I am just a truck driver but I thought you can gift your kids something like up to 8 million dollars without penalty. I'm sure I'm way off on this but that's what I was told by a very wealthy friend

 

[HNL2LHC]

If the kids did not own the house yet the parents can gift the down payment. I can’t recall the specifics. Maybe @shintoooo can reply and expand on the topic.

 

[BoatCop]

This will explain it all.

Do You Pay Taxes on Gifts From Parents? (2023 and 2024)

Normally, you don't pay tax on gifts from parents. Let's take a look at the IRS rules and break down who pays, how much, and how to avoid the gift tax.

smartasset.com

 

[ChumpChange]

I am just a truck driver but I thought you can gift your kids something like up to 8 million dollars without penalty. I'm sure I'm way off on this but that's what I was told by a very wealthy friend

The point is the parents don’t have liquidity. The gift tax is not the question, it’s the capital gains tax on selling stock to then gift.

Yes you can take a loan against the assets and not sell them.

 

[Done-it-again]

I was gifted shares of the business worth just under a mil and no one paid any tax on it but had to fill out the gift form tax for the IRS.

 

[Done-it-again]

The point is the parents don’t have liquidity. The gift tax is not the question, it’s the capital gains tax on selling stock to then gift.

Yes you can take a loan against the assets and not sell them.

Ding.... I missed that part on the first read...

 

[lbhsbz]

If the kids did not own the house yet the parents can gift the down payment. I can’t recall the specifics. Maybe @shintoooo can reply and expand on the topic.

I'm sure he'd have no issues answering that quick question

 

[ChumpChange]

I was gifted shares of the business worth just under a mil and no one paid any tax on it but had to fill out the gift form tax for the IRS.

Had a customer with a single son that was going to get the business. Had they gifted it just after the recession, no taxes would’ve been paid as he could’ve made a case of insolvency with negative retained earnings.

Unfortunately for them they put off estate planning. The son turned the business around and made tens of millions in profit over the next decade and suddenly taxes were in play.

But there’s always ways around taxes when you pay an accountant lots of money. Since the son did own 49% of the company, the shares wouldn’t go to the son but the company would buy back the shares that the parents owned which intern would make him 100% owner of all the outstanding company once all the parents shares were redeemed.

So pay your accountant. I’m sure @shintoooo would agree that you get what you pay for.

 

[shintoooo]

No capital gains on loans borrowed against assets.

 

[Done-it-again]

Had a customer with a single son that was going to get the business. Had they gifted it just after the recession, no taxes would’ve been paid as he could’ve made a case of insolvency with negative retained earnings.

Unfortunately for them they put off estate planning. The son turned the business around and made tens of millions in profit over the next decade and suddenly taxes were in play.

But there’s always ways around taxes when you pay an accountant lots of money. Since the son did own 49% of the company, the shares wouldn’t go to the son but the company would buy back the shares that the parents owned which intern would make him 100% owner of all the outstanding company once all the parents shares were redeemed.

So pay your accountant. I’m sure @shintoooo would agree that you get what you pay for.

Yes, we paid our accounting firm to make it all happen and also needed to get the business evaluated by a 3rd party and made sure the evaluation was for “tax” purposes and not a sale.

 

[JL95]

can i be your kid lol

 

[WYRD]

Yes, we paid our accounting firm to make it all happen and also needed to get the business evaluated by a 3rd party and made sure the evaluation was for “tax” purposes and not a sale.

You could have also bought the corporate stock shares for face value. Depending on how your corporation is set up it's typically much less than a business evaluation appraisal would come in at. Ours was 10,000 shares at $3 each.

 

[Singleton]

Multiple ways to pull this off.
Step 1 = talk to a good accountant plus a tax attorney.

spend a few grand talking to the rights folks, will save you thousands.

 

[2Driver]

Tell the “kids” to live with the house the way it is until they can get HELOC.

 

[Done-it-again]

You could have also bought the corporate stock shares for face value. Depending on how your corporation is set up it's typically much less than a business evaluation appraisal would come in at. Ours was 10,000 shares at $3 each.

Interesting... We are set up as a LLC so not sure if there is a difference between "shares" and 'stocks". not that smart if there is a difference.

The business evaluation was $4500 not bad considering, still needed to pay the tax firm to handle the extra paper filing during our tax preparations though. You know what they cost....lol

 

[Deckin Around]

Tell the “kids” to live with the house the way it is until they can get HELOC.

House needs sounded better than Eliminator Speedster deposit just for sake of conversation.

 

[JDKRXW]

Scenario:
The assets are in a trust for the kids

This is what has me wondering about your situation.
I know there are some ways around this using the cash value on an insurance policy to reduce capital gains tax.

 

[mesquito_creek]

SBLOC - security backed line of credit, rates are generally not any better than a HELOC. Most of the time they can also “call in the loan” if the value of the security drops.

You also said they lack or don’t want to leverage the liquidity they have in some asset class. So how will the principal of the loan be paid along with the interest?

The IRS has this one locked down tight since it’s the oldest game in town families have worked to transfer assets.

There are a lot of variables missing to figure out this exchange. See your CPA..

Most of the time paying cap gains at 15% beats paying ordinary income (with a lot of exception), so rip the Bandaid off and pay the taxes and move on.

 

[ChumpChange]

SBLOC - security backed line of credit, rates are generally not any better than a HELOC. Most of the time they can also “call in the loan” if the value of the security drops.

This reminds me of fun story of a customer getting $200 million out of China AND into the US. I think the bank was fined $50 million as well.

Fun story for when I’m not typing on my phone.

 

[Gonefishin5555]

My first thought is that anyone with a significant amount of assets invested in securities has got to have some stocks and especially bonds which have not really appreciated in value since they were purchased. No one bats a 100% in the market. They can probably liquidate a 100K with almost no tax liability. I don't like the margin or asset backed loan thing. You are giving the homebuyer additional debt to service and housing is already too expensive.

 

[Mandelon]

You can gift $18,000 a year to a minor. I'm pretty sure Dad can give each of them $18K, and Mom can gift each of them $18K. Do it now, and do it again in January. That gets you part way there. I assume you can gift them the stock without selling it, so there's no gains for Mom and Dad to be taxed upon.

Consult a tax professional! LOL

 

[evantwheeler]

The IRS has this one locked down tight since it’s the oldest game in town families have worked to transfer assets.

How does the IRS know if you give your kids 100k to pay contractor bills, or hell, just pay the contractors invoice directly? I've never had the IRS or anyone else for that matter question any of the money I spent. I'm just curious.

 

[mesquito_creek]

How does the IRS know if you give your kids 100k to pay contractor bills, or hell, just pay the contractors invoice directly? I've never had the IRS or anyone else for that matter question any of the money I spent. I'm just curious.

It starts with the 100k sale of stock that puts a bullseye on you. But you are right, you can give it a try and hope you don’t get audited… it’s tax fraud. But at the end of the day you can give it a try?

 

[bonesfab]

It starts with the 100k sale of stock that puts a bullseye on you. But you are right, you can give it a try and hope you don’t get audited… it’s tax fraud. But at the end of the day you can give it a try?

Just get elected to office and then all rules go out the window.

 

[DRYHEAT]

Come on man, pay your fair share.

 

[ChumpChange]

You can gift $18,000 a year to a minor. I'm pretty sure Dad can give each of them $18K, and Mom can gift each of them $18K. Do it now, and do it again in January. That gets you part way there. I assume you can gift them the stock without selling it, so there's no gains for Mom and Dad to be taxed upon.

Consult a tax professional! LOL

They don’t have the cash!!! The issue is not the gift tax, it’s the capital gains tax to obtain the cash.

 

[OldSchoolBoats]

Got a buyer right now getting $55k from parents. They are taking a loan against the assets.

 

[mesquito_creek]

BTW… the first $89,250 of your taxable income, the cap gain tax is ZERO. So if you live off cap gains (wink wink). Cap gain tax is the best rate to pay…